Ireland: What Corporates Need To Know About EMIR Refit

Shifting obligations: limited time

EMIR Refit will enter into force on 17 June
2019 and will amend the existing EMIR legislation applicable to
European counterparties trading derivatives, with the express aim
of simplifying the EMIR regime to make the compliance burden more
proportionate. We set out below the three key things that
Irish corporates need to know about EMIR Refit.

1. Immediate requirement to calculate the clearing
threshold

EMIR Refit introduces a new method of calculating the clearing
threshold for non-financial counterparties
("NFCs") such as corporates. When
determining whether the clearing thresholds have been exceeded, an
NFC must calculate its aggregate month-end average notional
position in OTC derivatives for the previous 12 months. This
is understood to mean the sum of all positions (for the relevant
class of derivatives) at the end of each month, divided by
12. In calculating the positions NFCs must include all OTC
derivative contracts entered into by any non-financial entities
within their worldwide group but excluding contracts which are
objectively measurable as reducing risks. EMIR Refit also
requires NFCs to be able to demonstrate to the relevant competent
authority that their calculation of the clearing threshold does not
lead to a systematic underestimation of the position.

On 28 March 2019 ESMA issued a statement explaining that the
new clearing threshold requirement will become effective
immediately once EMIR Refit comes into force. Therefore,
the results of the calculation must be available on 17
June2019. ESMA
stated that NFCs are "expected to collect all the
necessary data and information for the calculation in the meantime,
in order to be ready for the calculation...".

This constitutes an onerous obligation for NFCs. NFCs now
have a very short window of time to conduct the calculation of the
relevant group month-end position for the previous 12 months,
ending on 31 May 2019.

If, on 17 June 2019, an Irish corporate either (i) calculates
its average notional and determines that it has exceeded one or
more clearing thresholds, or (ii) does not perform the relevant
calculation, then it must immediately notify ESMA and Central Bank
of Ireland. It will become subject to the clearing obligation
for the class or classes of OTC derivative contracts in which it
has exceeded the threshold or failed to perform the calculation,
starting four months following that notification.

2. Financial counterparty now legally liable for EMIR
reporting

EMIR Refit amends EMIR to provide that, from 18 June 2020, when
an NFC- (meaning an NFC below the clearing thresholds) trades with
a financial counterparty (such as a bank / broker dealer) the
financial counterparty "shall be responsible, and legally
liable" for reporting the details of OTC derivative
contracts entered into. This will alter the current position, which
is that the both sides are responsible for reporting. The
NFC- still remains responsible for providing the financial
counterparty with the details which the financial counterparty
cannot be reasonably expected to possess and for ensuring that
those details are correct.

The Central Bank of Ireland has been focussed on the accuracy of
EMIR reporting as indicated by the recent "Dear Director" letter sent to derivatives
users, reminding the industry of the potential sanctions which
could apply to reporting failures. Against this background
the sensible changes to an NFC's liability for reporting are a
welcome relief for the industry. We understand that ISDA, the
global industry body representing the derivatives industry, is
currently working on revised versions of its standard EMIR
Delegated Reporting Agreement to reflect the change in legal
liability.

3. Intra-group reporting exemption

EMIR Refit introduces an exemption from the requirement to
report intragroup transactions where at least one of the
counterparties is a non-financial counterparty or would be
qualified as a non-financial counterparty if it were established in
the EU. To avail of this:

(a) both counterparties must be included in the same
accounting consolidation on a full basis;
(b) both counterparties must be subject to appropriate
centralised risk evaluation, measurement and control procedures;
and
(c) the ultimate parent undertaking may not be a financial
counterparty.

In addition, in order to avail of the exemption the counterparty
must notify the Central Bank of Ireland of its intention to apply
the exemption, and the Central Bank of Ireland has three months
from the date of notification to object.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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